2011-06-03 Danske Flash US - Nonfarm Payroll Weak, But Probably Too Weak

8/6/2019 2011-06-03 Danske Flash US - Nonfarm Payroll Weak, But Probably Too Weak

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Investment ResearchGeneral Market Conditions

The US job report was even worse than feared for May. Total payrolls rose ameagre 54,000, undershooting consensus by more than 100,000. The

unemployment rate rose for the second consecutive month.

Following the euphoria after the April job report, these numbers are a reminderthat we should not put too much emphasis on one set of figures. Rather, it is

necessary to look at the trend. The three million average of job growth is now

160,000 still up from the 120,000 pace early in 2011, but far from the 240,000

level in April.

Our nominal income proxy continues to point to robust income growth, as totalhours are still on a decent trend. However, there needs to be stronger payrolls in

the coming months to keep this trend intact.

The data will add to the growth scare. However, we still believe that we arewitnessing a soft patch and that growth will recover again in H2. Payrolls are

expected to reach an average of 200,000 in the summer. The rise in the

employment index for the ISM non-manufacturing in May - also released today

underpins the fact that job creation is still intact.

DetailsNon-farm payrolls rose 54,000 in May, which was much worse than feared. Although

expectations had been scaled back after the ADP number, the decline in the consensus

estimate from 200,000 to 165,000 was not sufficient. Our own estimate of 130,000 also

proved too optimistic.

The service sector was behind most of the weakness as job gains declined to 80,000 in

May from the strong level of 213,000 in April. The retail sector in particular disappointed

with a decline of 9,000 following a rise of 64,000 in April. The softness in consumption

recently may be hitting job growth in this sector now. The manufacturing sector also only

added 3,000 jobs down from 38,000 in April. Government jobs were weak again,

declining by 29,000 following a decline in April of 19,000. Hence the public sector

continues to be a small drag on job creation and this will likely continue for some time as

fiscal policy is tightened and local governments are making cutbacks.

The unemployment rate rose to 9.1% from 9.0% - also worse than consensus (8.9%). It

mirrored a rise in the labour force of 272,000 while employment from the household

survey was also soft rising only 105,000.

Average hourly earnings grew 0.3% m/m in May, higher than consensus (0.2%). But

downward revisions mean that the annual rate was only 1.8% vs expectations of 1.9%.

Hence wage pressures are very subdued.

.

03 June 2011

Important disclosures and certifications are contained from page 4 of this report.

Chief Analyst

Allan von Mehren

+45 45 12 80 55

[email protected]

Employment (May)

Act Con DB Rev (Prv)

Payrolls 54k 165k 130k 232(244)

- private 83k 170k - 251k (268)

Net revisions -39

Unemp. 9.1% 8.9% 8.9 9.0%

Source: Bloomberg and Danske Markets

Flash CommentUS: Payrolls weak

but probably too weak


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2 | 03 June 2011www.danskeresearch.com

Flash Comment

On a more positive note the three-month annualised rise in nominal income rose to 5.7%

in May from 5.6% in April. This is due to a still healthy rise in aggregate private hours of

3.9% on a three-month annualised basis. To keep up the pace of income growth, however,

we need to see payrolls pick up again in the coming months

Today, we also received the ISM non-manufacturing index which staged a reboundfollowing the sharp dive in April. Importantly the employment index also recovered to 54

in May from 51.9 in April. This points to service sector job growth of around 180,000 and

hence much better than the 80,000 seen in todays report.

Assessment and outlook

The data is a reminder to not put too much weight on a single number but rather to look at

the trend in data. Non-farm payrolls are rising on a 160,000 average, currently up from

120,000 in early 2011. While still being an improvement it is a much slower pace than the

240,000 increase seen last month. This is clearly a disappointment.

It is uncertain how much impact the distortions from the Japanese earthquake are having.

But given that most of the weakness is seen in the service sector, the main reason for the

softening is more likely to be the weaker consumption seen this year.

Where to go from here? We still expect non-farm payrolls to be on an improving path as

productivity is stretched to the limit; any growth will need to imply hiring. However, we

scale down our estimate for the trend in payrolls from 250,000 over the summer to

200,000. The slower growth seen early in 2011 is having a bigger impact on payrolls than

seemed likely after last months strong report.

The data will add to the current growth scare in the US and more people will call for QE3

from the Fed. However, we think the bar for more QE is very high this time as the

inflation picture is much different, with core inflation heading for 1.5-2%. Also, the Fed

will likely see this as a temporary decline in growth as most of the headwinds causing the

soft patch are turning and will provide mild tailwind in the coming quarters. Oil prices are

lower, Japanese production is on the rise again following a very steep decline in March

and China is expected to regain some speed in H2 as well. These are also the reasons why

we dont expect to see a double dip, but instead a soft patch followed by recovery in H2.

See charts on the following page.


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Flash Comment

Total payrolls trend at 160k Service sector growth getting strong

Source: Ecowin and Danske Markets Source: Ecowin and Danske Markets

Unemployment rises for second consecutive month Wage pressures are subdued... but stabilising around 2%


Nominal income growth still healthy ISM non-manufacturing employment index rebound in May


98 00 02 04 06 08 10

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Service employment >>


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Flash Comment

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Flash Comment

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2011-06-03 Danske Flash US - Nonfarm Payroll Weak, But Probably Too Weak